Force Majeure Clauses in Energy Contracts

For energy projects it is essential that careful thought is given to and contractual provisions included in contracts in order to mitigate against the potential for threats which could disrupt continuity of the contract and its performance.

Energy projects are generally high value, complex and with multiple interdependencies and parties making up a project’s contractual structure. These projects often include elements of construction work, supply and purchase, long term management of assets, connection to infrastructures and high value investment by multiple parties (with an expectation of significant returns on investment). As such these projects are especially vulnerable to force majeure events. When things go wrong unexpectedly and outside of the control of the parties, if the party which is prevented or delayed from performing by such events has not considered force majeure drafting, they may find themselves on the receiving end of a termination notice and a breach of contract claim of very significant value.

Force majeure clauses are designed to set out the consequences for contracting parties where events beyond the reasonable control of those parties occur and negatively impact on the ability to perform contractual obligations. A central objective of these clauses is to avoid or lessen the significant liability risk to one party (usually the “supplier” in the relationship) where that party is prevented from performing its contractual obligations and to avoid the contract becoming frustrated due to events the parties cannot control, prevent or overcome. Key issues such as suspension, deferral or delay of contractual obligations generally form the cornerstones of these clauses, alongside a definition of what events can be relied on to trigger the force majeure relief and often a right to terminate where the force majeure event continues for a period of time.

Under English law if no force majeure provisions are included in the contract, then a supplier would have to look to the common law concept of frustration to assist them if events beyond their control impact their ability to perform. If a case on frustration cannot be made out (and it is a notoriously difficult argument to run) then the supplier will be in breach of contract through failure to perform, in circumstances where common sense and commercial expectation might be that the supplier should be relieved from its obligations due to the impact of events which are no fault of its own. Hence it is essential for a party with performance obligations, such as an energy sector business, to include specific force majeure clauses in its contracts and to ensure those clauses are drafted appropriately widely. Points to consider and include in English law contracts are the types and scope of triggering event, along with clearly expressed terms as to causation, the relief given from performance obligations and the limits around that relief, obligations to mitigate and procedures for resolving disputes. It is important to note that force majeure differs according to governing law (for example between England & Wales and France), and therefore key to take specialist jurisdictional legal advice.

New threats to contractual continuity emerge and grow including increased and ever broadening cybersecurity and AI related threats, the impacts of climate emergency, emerging diseases, multiplying and increasingly complex sanctions and embargo landscapes worldwide, as well as military and other prejudicial actions by various actors, both state and terrorist. These multiplying threats also appear highly likely to occur with increasing frequency in the coming years, a trend we’ve all observed since 2020 and the Covid-19 pandemic and its aftermath. All prudent parties to energy projects of every kind will be making sure to give time and careful thought to the force majeure provisions, risks and outcomes in their contractual arrangements across the board.

It is essential you obtain legal advice on contracts and consider in detail the most suitable form of force majeure clauses for your project. For many years these clauses were often viewed by commercial parties as little more than boilerplate and given limited (if any) attention during negotiations. The experiences of Covid-19 and its aftermath, as well as recent geopolitical and other global events, have demonstrated how important it is to include contractual mechanisms to help parties cope with the unexpected, create contractual stability and distribute risk fairly if events take an unanticipated turn for the worse. When times are tough a well drafted force majeure clause could make the difference between the success and failure of an energy project, and even the continued financial viability of the businesses involved in that project.